Although many of them may not know it, California real estate brokers who act as designated officers (sometimes called corporate brokers or brokers of record) have reason to be pleased with a recent appellate court decision (Sandler v. Sanchez, Second Appellate District, June 18, 2012). The effect of the decision is that, in general, even if a designated officer fails to fulfill his statutory obligation to supervise the company sales agents, he or she will not have personal liability to third parties who may have been harmed by the wrong-doing of one of those salespersons.
The facts of the case were not pretty. The Sandlers, along with another party, were induced by Keith Desser, a real estate licensee representing Gold Coast Financial, to lend $600,000 to 765 South Windsor, LLC. The purpose of the loan was to finance improvements to an eight-unit apartment building for the purpose of converting the units to condominiums. The Sandlers were seriously misled. $600,000 was not enough money to do the improvements, and there was not sufficient equity in the property to secure their loan, which was junior. Moreover, Desser used $300,000 of the loan proceeds for his own personal expenses. When the senior loan foreclosed, the Sandlers were wiped out. Naturally, they sued.
Gold Coast Financial is a corporation. In California a corporation can be a licensed real estate broker. In order to do so, the corporation must designate a licensed individual broker as the entity's designated officer. Sanchez was the designated officer of Gold Coast Financial. As such, pursuant to California Business and Professions Code # 10159.2, he was "responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees…including the supervision of salespersons licensed to the corporation…" Thus, Sanchez was responsible for supervising Desser (even though salesperson Desser also happened to be the sole shareholder of Gold Coast).
The Sandlers, of course, sued everyone. But, by the time the case reached the court of appeal, Desser had died, and both Gold Coast and 765 South Windsor were insolvent. Sanchez was, so to speak, the last man standing. According to the court record, the Sandlers alleged that, "he, as Gold Coast's designated officer, owed them a duty in accordance with section 10159.2 to supervise Gold Coast's employees, including Desser. Had Sanchez fulfilled his duty to supervise, he would have learned about Desser's material misrepresentations and either disclosed them to the Sandler parties or cancelled the loan transaction.”
The court reviewed the governing law. It noted, "…10159.2 imposes a duty on the designated officer to supervise the corporate broker's employees. The question in this case is to whom is that duty owed?"[my emphasis] The court reviewed other cases as well as the legislative history that brought this section into being. It concluded that, similar to a section governing contractors, the relevant code section "…was regulatory and disciplinary in nature. It did not create a duty to third parties and therefore could not be a basis for the [broker's] personal liability.”
The failure to supervise could lead to discipline from the Department of Real Estate, and could even be grounds for action by the corporation against the designated officer, but - unless the broker had participated in the bad behavior - he could not be held liable for it by the injured party.